Krugman: "There's zero evidence that the kind of extreme inequality that we have is good for economic growth. In fact, there's a lot of evidence that it is actually bad for economic growth. Nobody wants us to become Cuba." Ah yes, inequality, the same inequality that the Fed - Krugman's favorite monetary stimulus machine - has been creating at an unprecedented pace since it launched QE. Just recall: "The "Massive Gift" That Keeps On Giving: How QE Boosted Inequality To Levels Surpassing The Great Depression." So while Krugman is right in lamenting the record surge in class divide between the 1% haves and the 99% have nots, you certainly won't find him touching with a ten foot pole the root cause of America's current surge in inequality. And, tangentially, another thing you won't find him touching, is yesterday's revelation by Gawker that the Nobel laureate is the proud recipient of $25,000 per month from CUNY to... study inequality.
Five years into the "recovery" and The Atlanta Fed thinks it's time to figure out where jobs come from (spoiler alert: there is no job tree). The Atlanta Fed has investigated trends in a variety of firm types to better understand why labor market progress continued to be slower than hoped for in 2013... the findings - when it comes to job creation, there is no simple solution. But Ben and Janet said?...
We are now entering the fifth season of head-fakes about “escape velocity” acceleration in as many years. Yet the Wall Street stock peddlers and their financial media echo boxes are so fixated on the latest “delta”—that is, ultra short-term “high frequency” data releases—that time and again they serve up noise, not meaningful economic signal. The larger point here is that the Kool-Aid drinkers keep torturing the high frequency data because they are desperate for any sign that the Fed’s $3.5 trillion of QE has favorably impacted the Main Street economy. And that’s important not because it might mean some sorely needed income and job gains for middle America, but because its utterly necessary to validate the Fed’s financial bubble.
*YELLEN SAYS FED COMMITTED TO ACCOMMODATION TO SUPPORT RECOVERY
Markets will be hanging on every word of what is likely Janet Yellen's first monetary policy speech and even more so the Q&A afterwards as she suggests that a considerable time is more than 6 months, and the delicate balance she has to play between admitting the economy is ugly while admitting that QE is over no matter what... all the while maintaining some semblance of credibility. One has to wonder if the ripfest rally of the last 24 hours is a buy the rumor ramp ahead of a sell the Yellen news event as once again she is tested...
With the economy now more than 5 years into an expansion, which is long by historical standards, the question for you to answer by looking at the charts below is: "Are we closer to an economic recession or a continued expansion?" How you answer that question should have a significant impact on your investment outlook as financial markets tend to lose roughly 30% on average during recessionary periods. However, with margin debt at record levels, earnings deteriorating and junk bond yields near all-time lows, this is hardly a normal market environment within which we are currently invested. Therefore, we present a series of charts which view the overall economy from the same perspective utilizing an annualized rate of change. For the Federal Reserve, these charts make the case that continued monetary interventions are not healing the economy, but rather just keeping it afloat by dragging forward future consumption. The problem is that it leaves a void in the future that must be continually filled.
Moments ago the Nikkei strategically leaked a report that the Japanese cabinet office, quite expectedly, will downgrade its economic assessment in its April report. "Expected" because as we reported, discretionary spending following the sales tax hike, has gotten crushed. Also not unexpected, the USDJPY took the news in stride and posted a modestly bounce in the face of today's relentless selling of the pair. Why? Because to algos and many asset managers desperate for more training wheels from central banks (now that everyone has forgotten how to trade based soely on fundamentals), this means more QE from the BOJ right - after all horrible news for everyone is great news for the 1%.
Not so fast.
Soaring student debt, competition from online programs and poor job prospects for graduates are shrinking the applicant pools for many universities and, as Bloomberg reports, the National Association of Independent Colleges and Universities warns "there will clearly be some institutions that won’t make it..through these difficult steps." Rather stunningly, Moody’s found that expenses are outpacing revenue at 60 percent of the schools it tracks even as many try to slash their way to balanced budgets," and concluded "what we’re concerned about is the death spiral... this continuing downward momentum for some institutions." As Harvard professor Clayton Christensen has warned, as many as half of the more than 4,000 universities and colleges in the U.S. may fail in the next 15 years, and is "not sure a lot of these institutions have the cushion to experiment with how to stay afloat."
Combining China's aggregate domestic production and apparent imports indicates that she has now over 3,514 tonnes. Assuming the U.S. still owns all the gold held by the Fed, this would make China the world's second largest national owner... but it remains unclear whether the Fed's published Gold holdings are actually the property of other nations. Clearly the recent price rise in gold owes something to inflation fears, repressed interest rates and to the Ukrainian situation. In the meantime, a growing awareness of a possible serious and increasing shortage of physical gold and a decline in the power of western central banks to suppress the price, point to a resumption of the fundamental bull market in gold, despite a possible increase in fears of recession.
On the 'growth' side, Commercial and Industrial loans are rising at a double digit annual rate of change (although it is unclear whether this is an indication of business optimism or stress - after all, we did see a big jump in these loans leading into the last recession). On the flip side, the bond market and the US dollar index seem to be flashing some warning signs about future growth. Simply put, the outlook for the economy is decidedly uncertain right now and we think so is the confidence in Janet Yellen. We think the more dire outcome for stocks would be if Toto fully pulled back the curtain on monetary policy and revealed it to be nothing more than a bunch clueless economists sitting in a conference room with no ability to control the economy or the markets. If US growth disappoints after all the Fed has done, how could anyone continue to view the Fed wizards as omnipotent? That would send the stock market back over the rainbow to the reality of an economy with big structural problems that can only be solved through political negotiation, something that has been notable only by its absence over – at least – the last 6 years. Are we headed back to Kansas?
What is an underlying explanation that can account for Momentum failing and Value working, but Quality NOT working? When one of my colleagues here at Salient saw these charts he said, “looks to me like the market is trading on a narrative of risk appetites and fear rather than toward some notion of seeking fundamentals or selling overbought growth stocks; otherwise Quality would be working, too.” To which I replied, “Amen, brother!” The notion that this market sell-off is limited to biotech or Internet or some other high-flying sub-sector because the market “realized” that these stocks were too expensive or out of concern with earnings this quarter (both explanations that I’ve seen of late in the WSJ and FT), just doesn’t hold water. These high-beta stocks are being hit hardest because they are at the epicenter of a broad market or beta earthquake. This is what it means to be high-beta…you live by the broad market sword and you die by the broad market sword.
For a decade or two, it's been dubbed the widowmaker (though truth be told, the losses are more bleed than massive capital loss like those holding US growth stocks currently), but as Barclays notes the Japanese bond market 'conundrum' (that nothing like a recovery is priced into the JGB curve, which is failing to price even a partial, eventual success of the Abe government's reflationary agenda) may finally be ready to be played..."We are always on the lookout for asset prices that seem inconsistent with the more plausible economic and financial scenarios. Sometimes these discrepancies point toward necessary alterations of our fundamental world view. In other cases, they point toward investment opportunity. At the moment, one of the most glaring discrepancies between macro and markets is the long end of the Japanese curve."
We hear a lot about climate change, especially now that the Intergovernmental Panel on Climate Change (IPCC) has recently published another report. At the same time, oil is reaching limits, and this has an effect as well. How do the two issues fit together? Unfortunately, the real situation is that the laws of physics, rather than humans, are in charge. Basically, as economies grow, it takes increasing complexity to fix problems, as Joseph Tainter explained in his book, The Collapse of Complex Societies. Now we are reaching limits in many ways, but we can’t - or dare not - model how all of these limits are hitting.
A look back at the headlines and market movements of the last month provides some useful color for why markets are weak and why now... As Scotiabank's Guy Haselmann warned early last month, there is a threshold point during the Fed’s attempt to normalize policy where the tide reverses and investors join in a sell-off in a race to avoid being left behind. This is why it's called the greater fool theory.
"The current levels of investor complacency are more usually associated with late stage bull markets rather than the beginning of new ones. Of course, if you think about it, this only makes sense if you refer back to the investor psychology chart above. The point here is simple. The combined levels of bullish optimism, lack of concern about a possible market correction (don't worry the Fed has the markets back), and rising levels of leverage in markets provide the "ingredients" for a more severe market correction. However, it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that 'this time is different.' Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion an unable to extract themselves in time."